Pakistan Economy Heading into Crisis – Experts Says

To avoid a full-blown balance of payments crisis situations, Islamabad likely is in need of external funds.
It can ask for bailout from the International Monetary Fund or seek fresh loans from Beijing. Neither option, however, may solve its economic fallout  in the long run.
The IMF’s strict austerity measures accompanying its loans are likely to damage the economic growth, while more Chinese debt could worsen Pakistan’s current account.
Foreign exchange reserves as at the four-year are very low, pressuring the local rupee and triggering worries that Islamabad may soon be unable to finance monthly import bills. The developing country is also awash in external debt, having taken on loans from China for the $62 billion China-Pakistan Economic Corridor.

To avoid a full-blown balance of payments crisis, Islamabad needs outside help. It has two options: the International Monetary Fund or Beijing. Neither, however, may solve its economic fallout in the long run.

The South Asian nation is no stranger to IMF bailouts — it has gone through 21 programs in total, with the most recent one ending two years ago. If the administration of incoming Prime Minister Imran Khan seeks out another loan, estimated at $10 billion, the country will be subject to the IMF’s strict austerity measures that’s likely to hurt growth. It also wouldn’t bode well politically for Khan, who called on the campaign trail for Pakistan to become self-sufficient.

The U.S., meanwhile, has taken issue with the idea of IMF funds going toward Pakistan’s Chinese debt obligations. “There’s no rationale for IMF tax dollars — and associated with that, American dollars that are part of the IMF funding — for those to go to bail out Chinese bondholders or China itself,” Secretary of State Mike Pompeo told CNBC last week.

In response, Pakistan’s finance ministry has refuted Pompeo’s linkage of IMF help with the China-Pakistan Economic Corridor.

Alternatively, Khan’s government could turn to China to get  fresh loans. But that would mean Islamabad wading even deeper into the so-called “Chinese debt trap” — a frequent criticism of Beijing’s infrastructure spending spree that’s known as the Belt and Road Initiative, of which the CPEC is a part.

Last month, the Asian giant loaned Pakistan $1 billion to boost its shrinking foreign currency reserves. For the current fiscal year thus far, China’s lending to Pakistan is set to exceed $5 billion.

Chinese preferential loans currently account for around 10 percent of Pakistan’s foreign debt, while 42 percent is from multilateral financial institutions, China’s embassy in the Islāmic Republic said this in a July statement.

Khan, who is due to be sworn in later this month, is without an obvious solution, analysts say.

“Without the implementation of a bold reforms agenda, neither option will be able to wean Pakistan off its addiction to foreign loans to keep its economy alive,” warned Uzair Younus, director of the South Asia practice at strategy firm Albright Stonebridge Group.

Cricket star-turned-politician Imran Khan, chairman of Pakistan Tehreek-e-Insaf (PTI), speaks to members of media after casting his vote at a polling station during the general election in Islamabad, Pakistan, July 25, 2018.

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